Dennis' Mortgage Blog

Question of the week:  Can you please explain the new Good Faith regulations that take effect in January?

Answer:  On January 1, 2010 the Department of Housing and Urban Development, HUD, new Real Estate Settlement and Procedures Act guidelines go into effect.  The major impact of the new RESPA regulations will be the new Good Faith Estimate (GFE2010) that will have to be provided to all individuals inquiring about mortgages.  What is interesting about GFE2010 is that to be in compliance with the new RESPA regulations the proper completion of the form puts the originator in violation of existing RESPA regulations that govern the Truth In Lending disclosure and also the Reg Z disclosures under the authority of the FDIC/Federal Reserve.

When the GFE2010 was rolled out then HUD Secretary Steve Preston hailed it as the form that would save consumers “nearly $700 at the closing table.”  This premise is based on limiting the fees that could change from initial disclosure to closing, disclosure of which is part of the new form.

Another purpose of the GFE2010 is to “bring clarity” to the market “through a simpler and better understanding of their costs.”  To do this HUD took the previous 1 page Good Faith Estimate that clearly delineates all charges and tailored perfectly into the HUD/RESPA required Truth In Lending disclosure (which discloses APR) and created a three page form that does not delineate any fees, lumps charges for non-related services together, separates out services required by the loan process from those the borrower can select and has not relation to the Truth In Lending disclosure or the Good Faith Estimate required under Reg Z by the Fed.

In going through training on how to complete the GFE2010, while also fulfilling the disclosure requirements of the Fed with the existing Good Faith Estimate and also the existing requirements from HUD for the Truth In Lending disclosure I kept hearing Ronald Reagan’s voice saying, "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'"

On the training conference call on Wednesday were originators from across the country who worked for direct lenders, brokers and banks.  The common sentiment was that the consumer will in reality end up paying higher costs for loans as originators will not want to risk under-disclosing costs and fees, not just their own but those of escrow companies, title companies, appraisers, surveyors, etc, and be stuck with the tab. 

Also impacting borrowers will be the inability to lock in loans early in the transaction as lenders must accept all fees and rates on the GFE2010 once they accept a loan.  If the market has changed and the loan was not locked in, or the originator under-disclosed fees the lender will be on the hook for the lower fees.  As a result we anticipate one of the fallouts of the new RESPA rules will be lenders not allowing mortgage rates and terms to be locked in until loan documents are being ordered.  In a volatile or up rate market this can be costly to borrowers, and for those on the edge of qualifying it could result in their loss of loan approval between application and documents.

To demonstrate just some of the issues the new RESPA regulations have caused, when issued the Fed contacted HUD to say, “hey your new GFE2010 puts everyone in violation of our Reg Z.”  To which HUD said, “so what.”  What HUD probably does not realize if that the new RESPA regulations also puts those in compliance in violation of HUDs current RESPA regulations.  The result is that it is impossible for any loan to not be in violation of any of the statutes and regulations that will be on the books on 1/1/2010.

Is this surprising? No, especially from current HUD Secretary Shaun Donovan, who earlier this year announced with great fanfare that he was allowing the First Time Homebuyer Tax Credit to be used for down payment on FHA loans; his plan was to allow non-profit agencies licensed by the states to loan borrowers the amount of the tax credit for down payment.  Then a few days later had to rescind the announcement when told that HUD does not allow funds for down payment to be borrowed for FHA mortgages.

The Secretary was not aware of HUD guidelines then and evidently he is still unaware of them.  So if you are an attorney GFE2010 may be a wonderful gift for you, if you are a consumer in the market for a mortgage in 2010 have some patience and be aware the government has just made your process have “more clarity.”

Oh, and if you are a cheat, liar or thief who has been operating in the mortgage industry taking advantage of consumers, you can probably carry on with business as usual since you never followed any of the past regulations I’m sure you won’t bother to follow the new ones. But hey, thanks for your effort in bringing these new disclosures to market.

Have a question for me?  Ask me!   

Another change HUD has made that will impact consumers is the change to approving condominium associations for FHA mortgages.  The implementation was supposed to begin this week but HUD has postponed it until the first week of December.  Under the new policy we will no longer be able generate “spot approvals” for individual units for FHA financing.  Once a complex is approved it must re-apply for approval every two years.  Many complexes currently on the HUD approved list will be automatically dropped from the approved list depending on how long it has been since they were certified.  And HUD will no longer approve condominium associations, they are requiring lenders approve the associations AND warrant them.  So if the Dennis Condo HOA wants to have it units eligible for FHA financing and goes to say Chase, or BofA, or Wells, for such an approval then all future FHA loans funded in the association have some of their liability going back to which ever lender issued the HUD HOA approval.  How many banks are willing to sign up for that?  Exactly.

The impact of the new condo policy will be to effectively kill FHA financing for condominiums.  With no mortgage insurers willing to insure 95% loan to value ratios on condos in  California the move by HUD essentially pulls the rug out from the condo market; and not just in California but across the country. 

Rumored to be next on HUD’s list will be an increase in the minimum down payment requirement, which has been in the 3-3.5% range my whole career (thankfully in the 1990s they went to a flat 3.5% from a complicated calculation we had to go through).  The most rumored number is 5% as the minimum down payment and requiring a significant portion of the funds be from the borrower directly, i.e. limiting gift funds from parents or relatives.

And just to pile on more FHA info….FHA is in deep financial doo-doo (that is a technical term I learned in Prof Lehman’s International Trade class).  Its reserves are almost at zero, about 3% below Congress’ requirement.  And foreclosures are mounting in relation to the popularity FHA financing has found in the current housing market which will further decrease reserves.  How to pay for the bad loans?  Raise costs on good paying loans.  FHA will probably raise further the fees for mortgage insurance in the first quarter of 2010.  For those with existing FHA mortgages they cannot retroactively raise your premiums so breath a sigh of relief. 

It is clear that FHA, once the loan for first time homebuyers, is moving away from that market; or is significantly raising the bar for millions of future first time homeowners.  Unfortunately it appears the individual ultimately in charge of how and where that bar moves is woefully unaware of the policies and procedures of the Department he leads.  We may find out very soon that Secretary Preston is to HUD what Director Brown was to FEMA.

Mortgage Backed Securities continued gains this week as the Fed bought another $13 billion or so of the market.  While there has been some intraday volatility for the most part the MBS market moved gently upwards.  With a slow week next week we don’t expect much to happen, but light trading can lead to big swings in prices.  Patience may lead us through the long Thanksgiving weekend and better pricing on the back side. However…we have been near and keep bumping up against resistance, meaning there is a floor rates have not been able to consistently break below.  Caution and prudence suggest taking advantage of the current market and cut future risk at the cost of possible future gains you may miss.  Remember, rates typically go up like a rocket and float down like a feather.

For the moment the market has moved lower with FHA this morning at all time lows and conforming nearing the mark—for now. 

Rates for Friday November 13, 2009:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.625%                            Unchanged

30 year conforming-jumbo 4.875%                   Unchanged

30 year FHA    4.5%                            Unchanged

30 year FHA jumbo 4.875%                            Unchanged %

Remember we have true, honest to goodness quality Jumbo rates again! Call for quotes as they vary depending on LTV, FICO and loan amount. 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Thursday after a fun long day in the kitchen, and out by the grill where the bird will be slowly reaching hot, juicy perfection, I will sit with Leslie and the girls, her mother and her sister and her family.  We will give thanks for each other, our friends and our blessings.  I will also be giving thanks for the many tremendous people in the real estate industry who have supported my business and career with incredible effort and service.  A special thanks will be given to all the families this past year, and every year, who have entrusted me with their mortgage transactions.  I love my job and my industry and am so thankful to be able to work with families to achieve homeownership, or to save thousands of dollars in payments every year, or to properly leverage their assets to achieve their goals.  Thank you to everyone who has enabled me to continue to work in such a great industry that provides for me and my family and for the fifteen pound bird that will be slow roasting on my barbecue!

Have a great weekend, enjoy the short week and Happy Thanksgiving!

Until next Friday,   

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.

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